Masco Corporation

Good morning, ladies and gentlemen. Welcome to the MASCO third quarter earnings call. My name is Jamaria, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. To ask a question, please press star, then the number one in your telephone keypad. To withdraw your question, please press the pound key. I will now turn the call over to David Chayka, Vice President, Treasurer and Investor Relations. You may begin.

Thank you, Operator, and good morning. Welcome to Masco Corporation's 2021 third quarter conference call. With me today are Keith Allman, President and CEO of Masco, and John Snevice, Masco's Vice President and Chief Financial Officer. Our third quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we open the call for analyst questions. Please limit yourself to one question with one follow-up. If you can't take your question now, please call me directly at 313-792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risk and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I now turn the call over to Keith. Thank you, Dave.

Good morning, everyone, and thank you for joining us today. I'm proud of the way our team continues to execute in these dynamic times. In the third quarter, sales increased 11%, our fifth consecutive quarter of double-digit top-line growth. This was against a strong 16% comp from last year. This growth came as we continued to face significant supply chain challenges. Certain raw materials were hard to come by, such as resins, microchips, and even pallets. Freight congestion in ports and lack of trucking capacity contributed to increased delays in shipping and receiving goods, and labor shortages continue to be a challenge. I would like to thank both our employees and our tremendous supplier partners, who together have worked tirelessly to address these challenges. They have kept our plants running and our customers supplied. resulting in outstanding top-line performance. Operating margin for the quarter was 17.5%, as we executed our planned transition to a more normalized level of SG&A expense to support our brands, innovation, and new products. Moving to our segment performance, beginning with plumbing, sales increased 15%, excluding currency. led by exceptional growth in North America and international faucets and showers and our spa business. These results highlight the strength of our plumbing platform diversity across geographies and channels. To support our continued international growth, Hansgrohe recently announced plans to invest in a new manufacturing facility in Serbia. This additional capacity will enable further growth and further strengthen Hansgrohe's capabilities to serve its customers. We plan to invest approximately $100 million in this project over the next three years. In our decorative architectural segment, sales grew 4% against a robust 19% count from the third quarter of 2020. Propate had an exceptional growth of over 45% in the quarter, helping to offset moderating demand in DIY paint. DIY paint declined mid-single digits against a tremendous comp of over 25% in the third quarter of 2020. We continue to see indications of DIY paint demand stabilization, as demand was fairly consistent throughout the quarter. When compared to our third quarter 2019 sales, our DIY paint sales were up over 20%. a clear indication of a re-engaged homeowner and strong home improvement fundamentals. Lastly, Behr Paint was recently recognized as the Home Depot Partner of the Year in the paint department. This recognition was a result of successfully keeping the Home Depot in stock during the DIY surge last year. Our continued investment in our joint effort to grow the Pro Paint category and our commitment to bringing new and innovative products, such as our recently launched Behr Dynasty, to the Home Depot. Each of these has contributed to tremendous growth for both Behr Paint and the Home Depot, and this recognition is a testament to the strength of our partnership. Moving on to capital allocation, we continued our share buyback activity during the quarter by repurchasing 2.2 million shares for $128 million. In addition, we anticipate deploying approximately $150 million in the fourth quarter, bringing our total share repurchases to over $1 billion for the year. Now let me give you an update on what we are experiencing with inflation. The second half of 2021 is largely unfolding as anticipated. We experienced low double-digit inflation in the third quarter, and we expect mid-teens inflation in the fourth quarter. We have taken pricing actions across both segments and expect to achieve price-cost neutrality by year-end. It has been an extremely dynamic year, and our supply chain and commercial teams have done an exceptional job managing through the many challenges. Because of this outstanding execution and continued strong demand for our products, We are maintaining the midpoint of our previous guide and expect to achieve earnings, full year earnings per share in the range of $3.67 to $3.73. Lastly, before I turn the call over to John, we are pleased to share with you that our comprehensive 2020 Corporate Sustainability Report is now available on our website. This report demonstrates our commitment to environmental, social, and governance responsibility. During a year of unparalleled change, our team members remained committed to maintaining our strong reputation for ethical business practices, reducing our environmental impact, and enhancing our DE&I efforts. I'm proud of the hard work we are doing every day to ensure that our employees feel a sense of inclusion, belonging, and support. Our progress in ESG is a priority for our board and our executive leadership team. I hope you will take the time to read more about how our long-term sustainability influences the way we run our business, operate our facilities, and contribute to the community. With that, I'll turn the call over to John for additional details on our third quarter results. John?

Thank you, Keith, and good morning, everyone. As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to slide seven, demand for our industry-leading brands remained strong, and our teams executed exceptionally well in a dynamic environment. This resulted in another strong quarter of double-digit top-line growth. Sales increased 11% against an impressive 16% comp in the third quarter of last year. Net acquisitions contributed 2% to growth, and currency had a minimal impact. In local currency, North American sales increased 9%, or 6%, excluding acquisitions. This strong performance was driven by outstanding execution to achieve volume growth in propane, faucets, showers, and spas, and by increased selling prices. In local currency, international sales increased a robust 15%, or 18%, excluding acquisitions and divestitures, against a healthy 9% count. Gross margin of 34.2% is impacted by higher commodity and logistics costs in the quarter. We expect this inflation will have peak impact on our P&L in the fourth quarter. We will offset these costs with additional pricing actions and productivity initiatives and expect the exit this year price-cost neutral. SG&A is a percentage of sales with 16.7%. As planned, During the quarter, we increased certain expenses, such as headcount, advertising, and marketing, to a more normalized level to support our brands. We expect this increase to continue into the fourth quarter as these costs continue to normalize. Operating profit in the third quarter was $385 million, with an operating margin of 17.5%. Our EPS was 99 cents. Turning to slide eight, plumbing growth continued to be strong with sales up 16% against the 13% count in the third quarter of last year. Net acquisitions contributed 2% to this growth and currency contributed another 1%. North American sales increased 16% or 10% excluding acquisitions. Delta led this outstanding performance, delivering another quarter of robust double-digit growth driven by strength in their e-commerce and trade channels. With strong brand recognition and general relationships, Delta continues to drive consumer demand for its products. Watkins Wellness also contributed to growth in the quarter as both demand and our backlog remained strong. International plumbing sales increased 15% in local currency, or 18% excluding net acquisitions. Hansgrohe delivered strong growth as demand continued to improve across Europe and numerous other countries. Hansgrohe's key markets of Germany, China, and the UK all grew double digits in the quarter. Segment operating profit in the third quarter was $248 million, and operating margin was 18.7%. Operating profit was impacted by the planned increases in SG&A that I mentioned earlier, as well as an unfavorable price-cost relationship. This was partially offset by strong incremental volumes. We anticipate additional SG&A increases in commodity inflation will most significantly impact this segment's operating margins in the fourth quarter. We will mitigate the commodity inflation with additional pricing and productivity actions and expect to be price-cost neutral as we enter 2022. For full year 2021, we continue to expect plumbing segment sales growth to be 22% to 24%, with operating margins of approximately 18.5%. Turning to slide 9, decorative architectural sales increased 4% for the third quarter, with 3% excluding acquisitions. Our DIY paint business declined mid-single digits in the quarter, against a more than 25% comp in the third quarter of last year. Despite this decline, DIY paint demand appears to be stabilizing, as we have seen relatively consistent demand since July. When comparing to Q3 2019, our third quarter DIY sales are up over 20%. Our propane business delivered exceptional growth of more than 45% in the quarter, as paint contractors are applying top-rated bare paint to more commercial and residential projects. We expect demand in this channel to remain strong as pro-paying contractors report growing demand for their services. When comparing to Q3 2019, our third quarter pro sales are up over 35%. Segment operating margin in the third quarter was 19%, and operating profit was $166 million. Operating profit was impacted by lower volume, increased commodity costs, and higher marketing expense to support the new Bayer Dynasty product launch, partially offset by higher net selling prices. For full year 2021, we continue to expect decorative architectural sales growth will be in the range of 2% to 5%, and operating margins to be approximately 19%. Turning to slide 10, our balance sheet is strong, with net debt to EBITDA at 1.3 times. We ended the quarter with approximately $1.9 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Working capital as a percent of sales, including our recent acquisitions, was 17%. Finally, we repurchased more than 15.2 million shares in 2021, for $878 million. This is approximately 6% of our standing share count at the beginning of the year. We expect to deploy approximately $150 million for share repurchases or acquisitions in the fourth quarter as we continue to aggressively return capital to shareholders. In turning to our full year guidance, I've summarized our expectations for 2021 on slide 11. We continue to anticipate overall sales growth of 14% to 16% and an operating margin of approximately 17.5%. Lastly, we are maintaining our 2021 EPS estimate midpoint but narrowing the range to $3.67 to $3.73 growth at the midpoint of the range. This assumes a 252 million average diluted share count for the year. Additional modeling assumptions for 2021 can be found on slide 14 of our earnings deck. With that, I'll now turn the call back over to Keith.

Thank you, John. Demand for our products and home renovation remains strong and at a much higher level than experienced in 2019. When you compare our third quarter performance to Q3 2019, revenue is 28% higher. Operating profit is 29% higher. Operating margin is 10 basis points higher. And adjusted earnings per share is an outstanding 62% higher. With our demonstrated supply chain excellence and our ability to offset inflation with price, we believe we are well positioned to keep this growth consistent with our long-term outlook. We look forward to sharing our detailed 2022 outlook on our fourth quarter call in February.

I'll now open the call for questions. Operator?

Everyone has a chance to participate. We would like to request that you limit yourself to asking one question and one follow-up question during the Q&A session. To ask a question, please press star, then the number one in your telephone keypad. To withdraw your question, please press the pound key.

Your first question will come from the line of Matthew Boulay with Barclays. Please proceed with your question.

Morning, everyone. Thanks for taking the call. You know, broader sort of.

do it for me strength here and the project demand uh john you just mentioned just given how strong it was was there is there anything else where you think you may have had some sort of structural success in boosting awareness or market share of bear pro or or conversely you know should we be aware of any more transitory benefits perhaps as customers are sort of hustling to find paint where they can, and you guys have done a great job of keeping Bear Pro in stock. How should we think about that balance? Thank you. Hey, Matt, this is Keith. I'll take this, and, John, you can add in if you have other comments. I think there are a few things that really contributed to that. you know, 45% growth that we saw in the quarter in pro. First and foremost, we had really outstanding supply chain execution. I can't say enough about our supply chain teams, our research and development teams that were able to move formulations, and our suppliers. We've been working with this supply base and have been pretty consistent in our supply register. for like 20 years. So those relationships really paid off in our hard-working supply chain and R&D. So really good availability of product and supply chain execution in general. We continue to invest in our brands. We've talked about that, and we've talked about that last quarter, and we continue to invest in our brands. And having that leading brand, having the leading quality, having the leading service levels all contributes, especially in tough and dicey times like we've just gone through. And we continue to execute in terms of new product introductions in our innovation pipeline, such as Bear Dynasty, a new line of aerosol paints, interior stains, caulks, and other adjacencies. So our ability to not only have that supply chain execution, but continue with the basics of the business of investing in the brands and executing new product introductions all paid off. And I think all those things are helping us. to drive demand. And, you know, we saw that in our performance in the 45% growth that we saw in pro, and we think that's enabled us to get new customers, and now it's up to us to develop the loyalty, which we've demonstrated an ability to do. So it was a very challenging quarter for us across paint, both pro and DIY, but I'm very happy with the execution.

Yeah, Matthew, the one thing that I would add to Keith's comments is that, you know, I think it's also a reflection of the investment that we've made over many years in this program with feet on the street, both, you know, calling on outsiders, on paying contractors, as well as the investment of people inside Home Depot stores and also Home Depot's investment in this program. So it's the joint partnership that we developed, you know, after the pro that I think really helped drive the success that we experienced here in the third quarter.

That's great color there. Thank you both for that. Second one, just on the Asian supply chain, where you guys have a relatively robust footprint. I guess a two-parter, any quantification you could give maybe on sort of the near-term cost impacts of everything going on with

ocean shipping and transportation from Asia, and then just longer term thoughts on any sort of supply chain repositioning that's sort of come about as a result of all these recent challenges. Thank you.

Sure, Matthew. Like everyone else that's reported so far this earnings season, we face supply chain challenges coming across the Pacific. yeah and we have seen the elevated um costs you know to get the containers across um to the united states and also as a result seeing delays in getting uh product you know through the through the port systems here in the united states whether it's on the west coast or any of the other ports that we bring product in um so you know the good news is you know even though we've experienced some of that we have also as a result passed through some of the price increase down because of the raw material inflation but because of some of the logistics uh inflation that we've experienced and so you know then that is uh do we feel good about our ability to to get that price and that's a portion of which allows us to feel good about being price cost neutral as we exit uh here in 2021. yeah just to add a little bit to john's comments i think

not strictly in the Asian supply chain, but overall when you look at inflation, we're experiencing or we experience low double-digit inflation in the third quarter, and we're expecting in that mid-teens region in the fourth quarter. And as John mentioned, good work on our commercial teams, and we will exit the year in price-cost neutral. All right. Well, thank you both, and congrats on that hard work.

My first question is just following up on some of the exposure in terms of inflation and inputs there. Can you talk a bit to what you're seeing in terms of some of the core commodities, the exposure, things like maybe copper, brass, you know, any of the sort of chemical inputs on the paint side? And I know you talked about, you know, seeing that mid-teens inflation in the fourth quarter, but just any more detail on how to think about what those trends are?

Sure. As I think we've all read and seen broadly across industry, there's been broad-based inflation, and we're experiencing that same thing. We're seeing it in metals, zinc and copper, as you mentioned, and that's across both our segments, particularly in the hardware and executive piece of architectural, as well as, obviously, in brass and plumbing sectors. We're seeing it in polymers, and again, that's across both our segments. Resins and paint, plastics in our plumbing valve train, for example, with our cross-link polyethylene and our cartridges for the valves, we're seeing it there. And then, again, same sort of story across both segments and logistics. Container costs continue to increase. escalate, even things like pallets and, of course, over-the-road trucking costs associated with some labor constraints that are broadly there in the trucking industry.

So it's broad-based inflation, and we expect to continue to see that in the fourth quarter.

And as we mentioned, we've done some good work and we'll continue to do work in the fourth quarter as it relates to achieving price-cost neutrality by the end of the year.

Yeah, Susan, maybe to put a finer point on Keith's comments, you know, I think for the fourth quarter, that would probably be the peak of inflation for the year. I suspect we'll feel mid-teens inflation, you know, in total across the company. There'll probably be low teens in the plumbing segment and probably high teens in our paint business. So, you know, pretty significant inflation. But, you know, as Keith mentioned, the team has done a terrific job of working to offset those costs here as we exit 2021.

Okay, that's very helpful color. And then as a follow-up, can you talk a little bit about what you're seeing across the various channels within plumbing? I know that you kind of highlighted some strength within the e-commerce as well as the trade channels there. Can you just give us some commentary on how the various channels are moving and, you know, any implications as we think about the margin trajectory there as some of those maybe continue to strengthen?

We're really seeing, again, strong, broad-based growth in plumbing. So if you look geographically, as we spoke in the prepared remarks, international is strong. We were very, very good growth in China, in the U.K., and in Germany, which are our core markets for Hansgrohe, and then good growth here in North America. With regards to channel and slicing it up by channel, Very strong performance in e-commerce. We've invested our best and brightest talent there. We've invested our capital in terms of acquisitions to build. And we've been working for a number of years in terms of our internal capabilities from logistics to pick and pack quantities of one to handling returns. marketing and generating more efficient search, a better purchase journey for the consumers, et cetera. So a lot of work has gone into that, but we saw real strong growth, particularly in plumbing and e-commerce and also in the trade channel. And then strong, as we mentioned, strong pro-growth in paint. So really good performance across multiple channels and multiple geographies, and I can think Susan, that speaks to the work we've done in terms of the portfolio of driving affordable, smaller ticket items that are involved in quicker remodels, if you will, and price points, et cetera, has really delivered for us a nice, robust portfolio, and I think that's a big part of it.

Susan, maybe to give you a little bit more color on one specific change, Let me talk a little bit about the e-commerce channel and the recent acquisition of Kraus and how that's aided our e-commerce growth. So Kraus, you know, the Kraus we bought in the beginning, really the tail end of last year, and the integration is going well and they continue to perform above our expectations. You know, when we've made some good investments along, you know, with Krause's complementary products and online presence, and they helped to actually strengthen some of Delta's market-leading offerings to drive future growth. You know, one of the things we specifically have done is, with the help of Krause, we've launched Delta-branded syncs online, utilizing their offering. And this is, you know, really a good contributor to our growth here in the back half of 2021. So... You know, e-commerce, Delta was strong in e-commerce before we acquired Krause, and the Krause acquisition has really complemented, you know, Delta's strength in the online channel to accelerate its growth.

Great. That's very helpful, Collar. Thank you, and good luck with everything. Thank you.

Your next question will come from the line of Mike Dahl from RBC Capital Markets. Please proceed with your question. Morning.

Good morning. Thanks for taking my questions.

Really exceptional results across the segments, particularly in paint, in light of what some of your peers are saying. So I have a couple of follow-ups. Keith, I know you mentioned a couple of things around your supply chain partners and how you've kind of successfully managed there, but it is striking, in terms of your ability to not just get product but keep the inflation lower than what I think most of your public peers have talked about in that segment. So I'd love to hear, you know, just a little more detail or color on exactly kind of how you've managed this or what you think you've done differently than some of your peers over the last few months. You know, at the risk of maybe being redundant to what I've already talked about, I can't overstate what our supply chain teams have been able to do, and it's a product of a great partnership. with Home Depot and the simplification and the focus that we have. We work hard to understand the Home Depot cut consumer, and we work hard to understand the Home Depot supply chain. And fundamentally, everything that we do is geared towards and focused on that customer and those consumers. And because of that, I think that makes us fleet of foot. It helps us be able to do the sorts of things that we need to do and react quickly when times get tough. It's mind-boggling when you think about the types of formulations that we had to go through in our R&D department in terms of changes and revalidations to be able to move from one supplier to the next, be it on colorant or resins, and really that's across our entire business, but specifically in paint. I think when you look at our formulations and how, you know, what goes into our formulations and what was particularly tight in terms of capacity, I think that gave us a little bit of advantage. And it has not been even challenges. But fundamentally, I do think it has to do with the extreme focus and dedication we have on a specific customer and the consumers and the ability to manage that versus

to simplification, 80-20, a focus on our teams, and absolutely the highest quality workforce, particularly in supply chain and R&D.

That's great. Thank you. And then just as a follow-up, you know, Bear Dynasty specifically, can you help us? kind of size what the contribution was from a top line perspective in the quarter. And, you know, you talked about some increased marketing costs around that. Just how should we be thinking about that program in the fourth quarter or the sell through?

Yeah, Mike, it's general knowledge in the quarter. You know, so obviously it helped the top line growth number, but it wasn't a huge driver of our overall growth.

It's our best paint ever. Best scuffs, scuff resistant, most one color, high colors, fast drying, certified green guard.

It's just extremely good paint. It's our highest price point yet, but when you match it with those attributes, it's a good value. I mean, my father bought some of it. Let me tell you, he's as excited as they get. And while that's only one point, it's indicative of what kind of value this can bring.

And it's an example of how our deep and extended relationship with depot can really help.

We consistently bring that innovative new products and market-leading attributes. And we do that, you know, I like to – think of our teams fighting above their weight class.

You know, we are focused.

Your next question comes from the line of Bill. Your question.

Hey, guys. Congrats on a really impressive quarter and a challenging backdrop. And great to see demand being really strong here. Any color on how you're thinking about organic growth as we look out to 2022 since your comps did get a little tougher in the first half? And how much line of sight do you have?

Yeah, Phil, it's John. You know, you're right. The comps, as we go into the first part of 2022, will be tough. Obviously, when we post 31% growth in the Q1 and 53% growth in Q2, and plumbing, I should say, 25% overall, 24% in Q1, 24% in Q2, those are tough counts to go up against. That said, as I mentioned in my prepared remarks, we've got continued good backlogs in a number of our businesses that we've got visibility into. We mentioned the fact that Watkins, our wellness business, continues to have a very strong backlog of businesses.

probably several hundred million dollars.

Our plumbing businesses, both Hansgrohe and Delta, to the extent that we look at their backlogs, they are bigger than they would historically be at this time of the year, given the seasonality of things generally slowing down. So we do think that the first part of growth going into the first part of 22 will be good, but obviously we're up against some pretty tough comps. Beyond that, Keith, you know, I don't know, you know, pain is, you know, we've got a little bit less visibility into the backlog of pain other than on the pro business where we see some of the commercial projects coming through.

Yeah, I'd add our international markets are also recovering nicely. And we'll have more detail on 2022 in our fourth quarter call.

You know, Phil, but, you know, I would say that, you know, if you think about, you know, the macro trends where we stand right now, macro trends really set up for a good 2022. The two big ones that we watch, because it really does impact our low-ticket repair remodel portfolio of products that we have, are existing home turnover and home price appreciation. As you know, those two have been very good, and you layer those two onto the fact that consumers' balance sheet is very good. You know, all statistics say that, you know, $2 trillion of more savings as a result of the pandemic that the consumers are sitting on now. And the fact that the home is, you know, for the vast majority of consumers, it's their largest investment. We think this environment bodes well for continued investment in homes. We're hearing about backlogs of big-ticket projects with contractors and So, you know, we think that, you know, the supply chain tightness that consumers have experienced have contributed to that backlog of big ticket projects. And so going into 2022, we think the environment is set for good growth.

And appreciate some of these challenges. I think there was an expectation for maybe restocking inventory in the chat on the fourth quarter. Any color on how that has kind of progressed? Is that more of an opportunity when we think about 2022 as well? Thanks a lot, guys.

You know, it's very difficult to predict the supply chain in this environment. I think some things will have a little bit more lasting impact. I think logistics will probably remain tight well into 22. Our, if you will, the blood pressure metric that we look at is our fill rates coming from our supply base and our timeliness and accuracy of delivery dates versus promise. And those are starting to improve. Now, we have a long way to go. We're not back to where we need to be. But I would say in terms of our supply and incoming, we are starting to see some improvement and a little bit of stabilization as we look at those two key metrics. Jamari, I think we can go to the next question.

Your next question will come from the line of Adam Baumgarten from Zellman. Please proceed with your question.

Hey, guys. Thanks for taking my questions. Good morning. Just looking at decorative on the implied queue, do you expect a similar pro-op performance to continue through the end of the year?

Yeah, I think, again, we expect pro to remain strong as we go through the balance of the year. You know, whether it's going to be the same, you know, 45-plus percent growth we realized in Q3 is, you know, yet to be determined. But based on what we're hearing from pro contractors, based on the projects that we're hearing in terms of contractor backlogs, you know, we do think the pro demand will continue to be quite good.

Okay, got it. Thanks. And then just on the SG&A spend kind of normalizing, when do you expect to reach that full normalized run rate? Is it by the end of this year, or will it drag into next year?

It'll probably drag into next year, Adam. You know, if you think about our SG&A spend, you know, we've talked since the beginning of the year about $40 million of of spend that we pulled out of the system last year during the height of the pandemic. And, you know, we'll slowly lay that back in over the course of the next several quarters. You know, Keith mentioned earlier, you know, we're investing in our brands. We're investing in the top-line growth that you witnessed today, that we reported today. So, you know, some of that investment, you know, we'll be mindful of it.

You know, we're not going to just, you know, let it all flow back in.

So suffice it to say that our businesses have their fingers on the dials and are actively managing that cost as it comes back in. Thank you.

Your next question will come from the line of Derek Schmoy from Luke Capital. Please proceed with your question.

Hi, thanks. Good morning. Just given the rising price points and inflation, I was wondering if you could speak to any change in the mix that you might be seeing in plumbing and paint and if that's being impacted at all.

You know, Garrett, you know, mix really wasn't that big of an issue in the quarter. There may have been a little bit of slightly favorable mix in plumbing as, you know, we've seen a little bit greater strength in Europe, which can tend to mean we get more projects, which means our Axor brand does a little bit better. And maybe some of our spa business is trended to a little bit more of a favorable mix. But beyond that, it wasn't all that impactful in the quarter.

Okay, thanks. And then to the extent you can provide a little bit more color on your expectations for margin expansion in 2022, do you recognize you're going to provide more guidance after next quarter for margin expansion across your businesses to begin early in the year?

You know, we've talked about this and we haven't changed Our outlook, and that is that we have nice drop down in incremental volume. We'll exit the year at price-cost neutrality.

There still is, you know, questions about where commodities will move, if at all, in 2022. And I commend that if they do, we will handle that as we have in the past with productivity and further price if needed. So when we throw that all together, as we've talked in the past, we're looking at margin expansion, not in the hundreds of basis points, more in the tens of basis points. But our commitment and how we drive our leadership teams and how we structure our variable compensation for those teams is growth above market and margin expansion. That's fundamentally part of our culture and how we drive our businesses, and that's what we will achieve in 22. Great.

Thank you.

Your next question will come from the line of Deepa Radwan from Wells Fargo Securities. Please proceed with your question.

Hi. Good morning, all. Thanks for taking the question. Let me start with some October trends. Just here so far, please.

Yeah, I think we've really moved to talking about how we've exited the quarter, and we're not going to get into slicing and dicing that up on a monthly basis. And the reason is because there's ebbs and flows. There's different parts of our businesses, launch products, have fill, and different things happen. So it's more productive and a better indicator.

uh for how we're doing for our business if we stick to the course okay understood um how about the quarter then any surprises either positive or negative during q3 and anything that you would point us out as we look into 2022 to be aware of that we shouldn't probably carry forward

in in terms of surprises not you know it's playing out as we expected as they said in in our opening uh comments i will say uh that while i have a high expectation of our supply chain team i was pleasantly uh surprised and happy to see how well we really performed we talked about it in paint uh the same could be said uh in plumbing and and that that had a real impact on our business and how we fared competitively so uh that was uh well maybe not a

I'm not surprised. It certainly was nice to see, and I'm proud of the teams.

Great. It was a nice quarter, though. Thanks so much. Thank you.

Your next question will come from the line of Keith Hughes. Please proceed with your question.

Thank you. Questions in plumbing. I guess looking at the growth both in North America and Europe, give us some sort of a feel. How much of that growth in units and how much of that growth is price mixed?

You know, Keith, as we look at it, we did see good volume growth in plumbing, both domestically and internationally. So, you know, and don't forget acquisitions contributed to growth as well. But if you retract about the acquisitions, I'd say if you had to weight the two of, you know, volume mix versus price, I'd say in plumbing you're much more heavily weighted on volume than you would on price in the quarter.

Okay. Looking at the difference in growth rates, excluding acquisitions between North America and international, international is a bit higher. Was there certain regions internationally that really stood out that pushed it higher than the U.S.?

So internationally, yeah. The three that we mentioned that grew double digits were Germany, China, and the U.K. And as you might expect, Germany and China had relatively easy counts compared to Europe. given the third quarter of last year. China was actually growing nicely in the third quarter of last year and continued to grow. So that was a bit of a positive surprise for us, just the strength of the Chinese market over there. But other than that, if you factor out those three large markets, but if you look broadly across the 140 markets that Hans Grohler sells into, Nearly all experienced countries we sell into grew in the third quarter. Okay, thank you.

Your next question will come from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Yeah, thanks a lot, guys. A couple of questions on deck arc, specifically paint.

You know, Keith, I'm reminded about how Bear has this longstanding history of just excellent fulfillment, and it was good to see that. I guess that really was a standout again this quarter.

the diy segment of the business uh if we look at things kind of uh you know in terms of a kind of a two-year stack uh in your commentary it kind of suggests that we see any kind of volume acceleration um in 3q and then on the pro side of the business uh you know builders scrambling around you know sending guys to home depot to go get paint to get homes closed i'm wondering how How much of a benefit do you think that was to be up 45%?

And do you think that business can be sticky? So a couple parts to your question. Firstly, yeah, we did see some positivity in terms of gallonage when you look at DIY Q3 21 versus Q3 19. So we did see some slight positive gallonage there in terms of overall volume. And obviously, with the price, we saw some very nice revenue volume when you do that comparison stack over 19. In terms of was our supply chain performance versus competition a factor in getting a look from some pros, I would say yes. And it's incumbent on us to make that as sticky as we can. And we'll see. I'll tell you, I feel good about it. This new Dynasty brand is being applied and installed by some professionals. It's working well. And the brand has pulled with consumers. And so when you think about the pro and the regular, looks that we're getting, I think we fare well. But it's incumbent on us to start to develop that kind of loyalty in those pros like we have in other pros. Certainly a factor, and we'll work as hard as we can to make it sticky. Yeah, certainly you have the opportunity, so that's good.

If you look at, I just wanted to clarify one thing about your

Many comments on cost inflation. Were there any sub-segments worth calling out, let's say lighting or hardware or Hansgrohe or whatever? Were you actually were price cost neutral already in 3Q or were you where you expect to be price cost neutral in 4Q? I don't just mean by year end, but I mean actually in 4Q. And could you comment specifically on labor inflation in your outlook? Yeah, I'm not going to get into slicing and dicing it by individual commodities or products or segments and that sort of thing as it relates to price-cost. But in terms of labor, that continues to be a challenge, as we talked about. And that's one of the things that we're working very hard to do as it relates to programs, whether white-collar or blue-collar. as it relates to safety in our factories and programs for different work engagements, if you will, or different work methodologies as it relates to work from home or hybrid or coming to the office sort of thing to appeal to as much of the laborers as we can. And that includes, in some cases, some wage increase and wage inflation. So, yeah, labor is an issue, and I think that's globally across industry, but we're also seeing that.

Okay. Makes sense. Thanks, guys.

Thanks, Steve.

Your next question search, please proceed with your question.

Yes. Good morning, everyone. And Keith, congratulations on a great quarter. A lot of great execution. You talked about trying to achieve price or you will achieve price cost neutrality by the end of the year. And I guess I'm just wondering about the extent to which with that push on pricing here in the second half, how much carryover pricing you would have into 2022. And also, if I could just get some clarification around that price cost comment. You noted that you'd be price-cost neutral in plumbing, but if you mentioned it for decorative architecture, I may have missed that. Are you expecting with the higher inflation in decorative architecture to be price-cost neutral by year-end there as well?

Yes, we are, across Moscow.

Okay.

Yeah, David, there will be some carryover pricing.

You know, we'll get into more color on that on our fourth quarter call.

you know, in February.

Okay.

Obviously a very strong market share performance in ProPaint, but can you just talk about where else within your product makes you may have gained share in the quarter?

Well, you know, we had a very, very solid performance in plumbing, plumbing trade in particular. E-commerce continues to be. We believe we're a leader in e-commerce, and we continue to. We believe gain share. I'll tell you that it's very difficult to accurately pin down overall market volume in a particular quarter. So that, you know, we'll see as we end the year and we go through our models that we use to estimate total market size. But I believe we're gaining share in trade plumbing and e-commerce. Certainly we think we're gaining share in our spa business and our wellness business and Watkins. That continues to perform quite well. And when I look at our growth in Europe versus what our competition is doing, I believe we're gaining share at Hansgrohe as well. But, again, it's difficult. I like to speak with absolute numbers and run it through our market model, and it's very difficult to see the actual market size quarter to quarter. But we're doing well in Watkins, doing well in Europe with Hansgrohe. Great. Thanks very much.

Your next question will come from the line of Ken Ziener from Key.

Please proceed with your question.

Good morning, everybody. Morning.

Paint, up 4% headline. As noted, the volumes were down, which contributed to that operating margin. Could you maybe discriminate?

If you look at the paint PPI index, it says PPI was up about 10% in the third quarter. Could you maybe give us a sense of that pricing magnitude? And then for those three buckets that hit operating margins, the volume, commodity costs, and marketing expenses. Could you maybe give us a sense of magnitude of those buckets? That's it. Thank you.

Yeah, Ken. So, you know, in terms of our, you know, inflation in paint, so, you know, that was the inflation that we felt, and that obviously had an impact on the margin that we developed. In terms of You know, I'm not familiar with the PPI index, but, you know, I think that addresses your question.

Right, and then the impact for the volume versus for the margin impact.

Oh, you know, so if you think about, yeah, so, you know, obviously with volumes being down, you know, that had a pretty negative impact on the margins, you know, as well as from the investment that we put back into the business during the quarter. I think those are the two probably bigger impacts, you know, with pricing being a small offset to those. Thank you very much.

Your next question will come from the line of Stephen Ramsey from Thompson Research Group. Please proceed with your question.

Good morning. Some of our recent channel checks point to some companies reducing SKUs to focus on better margins, better volume products given the supply chain issues. Are you doing this in any product categories? And if so, would it be on a near-term or long-term basis?

Part of our ability to perform as well as we did with respect to supply chain, and this was in plumbing, was simplifying our assortment for a month, I believe, in that range to allow our suppliers to do less changeovers, have longer runs, and ultimately do a better job of supplying our customers. So there was a little bit of that, but it was short-lived. It helped out, as I said, our supply base with longer-run qualification and 80-20 thinking as part of the Maskell operating system, and we applied that. In this case, during this tough issue around supply chain, but that's over for the most part. Those skews are back in line, and that's, again, part of what gives me confidence that we're starting to get some relief on some of these issues as it relates to supply chain, particularly from our great supplier partners.

great and then maybe taking that topic and thinking broader the supply chain and labor issues are they forcing you to to make changes to fill demand and support margins in the near term that uh will have to be kind of reversed or changed in a major way as the uh supply chain environment normalizes over the next one year plus could you could you restate that question for me i wasn't tracking with you i apologize I guess what I'm getting at is the near-term changes to manage this environment that you're having to make. Will those have to be reversed in a major way as the supply chain and labor market normalizes over the next three to six quarters?

No. No reversing of any kind of thing. That was just indicating that we did take.

Great. Thank you.

We do have a question in queue from a participant that did not record their name or their firm name, but they are calling from a 216 area code. Caller, please state your name and firm and provide for your question.

Sounds like me. It's Eric Bossard, Cleveland Research. Two things.

First of all, the incremental pricing, do you have to take incremental pricing now or in 14?

Yes, we will be implementing price in the fourth quarter, Eric, to help offset inflation, yes.

Is that in both businesses?

No, across the company.

Okay.

And then secondly, in terms of faucets or plumbing, I'm curious if you're seeing within the business any change in mix in terms of what consumers are buying and

Is you've raised price, or is your managing the product offering? Have you seen any notable change in behavior from consumers?

Not really, no. The mixed change, as John talked about, was relatively small and more associated with different regions growing that tend to be higher mix. Like Europe growing quite well, and that tends to be a higher mix, and our spas continue to grow, which is a higher price point. But we're not seeing any mixed shift as it relates to pricing changes. Okay. Thank you.

Thank you.

And we do have time for one final question, which will come from the line of Truman Patterson. Wolf Research, please proceed with your question.

Hey, good morning, everyone. Just wanted to hop on for a couple items that I don't think have been touched on yet.

Clearly very understand, you know, in order to, you know, make this stickier, have you all started targeting

I don't know, local or regional builders for exclusive contracts or any other kind of sales strategies to make sure that this momentum continues moving forward.

We're not going to get into the competitive nature in terms of our Salesforce execution and what we're going after. But fundamentally, it's about understanding the value that we bring and then targeting the customers that would appreciate that value the most. So we're not out there. We definitely are segmenting. And that's part, again, of our 80-20 simplification where we believe we have the best chance. That's where we'll put our sales efforts. So we are targeting our sales approach, and we are looking at different attributes for those specific customers. I won't go and say specific, you know, long-term contracts or anything of that sort. I won't get into specifics. But along those lines of targeting our offer to what the customer values the most is exactly what our culture is about.

Okay. And then... On the M&A strategy, you know, you're generating strong free cash flow, $850 million of cash on the balance sheet. Could you just give an update of your overall strategy there, the pipeline of deals and valuations? You know, we've been hearing that they're fairly elevated.

Yeah, it's John. I think a good way to think about our M&A strategy is take a look at the four recent acquisitions we've done in the last year. So we did, you know, four of the four. Each of them are very aligned with the strategy of one of our business units. So in the case of Krause, you know, Delta is looking to grow their e-commerce strategy, and Krause is a great complement to Delta's already strong presence in the e-commerce channel and in our businesses.

You know, that focuses on Delta's strength with their trade business with the Steamship. Shower business is of demand.

It's hand in glove there. Obviously, the applicator business that we bought earlier in the year complements, you know, Bayer's paint offering. And then the high-style drain business we bought in Europe complements Hansler's high-style showers and faucets. And so as you think about where we're focusing our efforts, It's on these smaller bolt-on talk-in type businesses that have an alignment with the strategy of one of our business units. Our team that we've got in place is doing a great job of these smaller businesses. And I would anticipate there will be future acquisitions. Obviously, we can't, you know, foreshadow the timing of those. But, you know, the team's working hard. Part of the reason that we're focusing on these – But also, to your point, the valuations as you move up in terms of size are quite high. And so we see better value in the lower middle market. And so that's where we're focusing our efforts at this time. And then I think we'll continue to focus our efforts in that lower middle market over the coming months and quarters.

All right. Thank you all. I'd like to thank everyone for joining us today and for your interest in MASCO. That concludes today's call.